Frequently Asked Questions – Securities Trader | Securities Trader Principal

FREQUENTLY ASKED QUESTIONS
(Click On Any Question For An Answer)

Series 57 Examination

Series 57 Registration

Algorithm Trade Regulation


Series 57 Examination

Question: What is the Series 57 Trader Securities Registration?

Answer:

Series 57 Securities Trader Qualification is a revision to Rule 15b9-1 that is designed to require broker-dealers engaged in proprietary high-frequency trading (HFT) of securities or other applicable products to register with a regulatory association.

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Question: Who can qualify for Securities Trader registration series 57?

Answer:

There is no prerequisite registration requirement for Securities Trader registration; however individuals who engage in sales activities with the public are still required to hold the appropriate securities registration to cover that function.

Passing score on the Series 57 Exam will be 70%

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Question: What does the series 57 registration not cover?

Answer:

License for series 57 alone does not qualify for registration as a Securities Trader Principal. In order to qualify as a Principal the member must pass the series 57, and the General Securities Principal examination, series 24.

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Question: What if I am registered as series 55 or series 56, can I be grandfathered in?

Answer:

Yes. Anyone holding a Series 55 or Series 56 registration will be grandfathered into the new Series 57 registration category. Individuals who have scheduled their Series 55 exam by January 4, 2016 will be permitted to take the Series 55 exam on their scheduled test date (even if after January 4). Candidates who do not schedule their Series 55 exam date by January 4, 2016 will be required to take the Series 57 Examination.

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Question: When was series 57 securities trader adopted by FINRA and SEC?

Answer:

In April 2015 FINRA issued a survey to members with the series 55 license gathering statistics about current roles, responsibilities, and functions of Equity Traders and Proprietary Traders. Feedback from that survey prompted the November 2015 FINRA release of regulatory notice 15-45 announcing the implementation of series 57 at January 4, 2016.

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Question: What is on the series 57 Securities Trader Qualification exam?

Answer:

The FINRA published content outline for Series 57 examination provides a comprehensive guide to what is covered on the examination and area candidates should familiarize themselves with for the examination.

The four major job functions performed by a Securities Trader are: (1) Market Overview and Products – 22 questions; (2) Engaging in Professional Conduct and Adhering to Regulatory Requirements – 21 questions; (3) Trading Activities – 79 questions; and (4) Maintaining Books and Records and Trade Reporting – 12 questions.

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Series 57 Registration

Question:What is required to qualify as a Securities Trader or Securities Trader Principal (Series 57 & Series 24)

Answer:

To register with FINRA as a Securities Trader the person must pass the Series 57 Securities Trader examination. Four major job functions are performed by Securities Traders: (1) Market Overview and Products – 22 questions; (2) Engaging in Professional Conduct and Adhering to Regulatory Requirements – 21 questions; (3) Trading Activities – 79 questions; and (4) Maintaining Books and Records and Trade Reporting – 12 questions.

The Securities Trader Principal designation is a new principal category put forth for persons supervising applicable HFT and Algorithm Trade activities. There is a grandfathering provision for those who have passed the Series 55 and Series 24 prior to the effective date of January 2016. The Securities Trader Principal designation replaces the Proprietary Trader Principal category. Securities Trader Principals have supervisory responsibility over activities in Rule 2020(c). To qualify as a Securities Trader Principal the candidate must pass Series 57 and Series 24 examinations.

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Question: Who must register for the Series 57 Registration – July 2016?

Answer:

FINRA’s goal is to ensure that firms identify and register one or more associated persons who possess knowledge of, and responsibility for, both the design of the intended trading strategy (e.g., the arbitrage strategy) and the technological implementation of such strategy (e.g., coding). The person must be able to evaluate the trading strategy design and determine that it achieves business objectives and regulatory compliance concerns.

Specifically, beginning January 30, 2017, each associated person who is primarily responsible for the design, development or significant modification of an algorithmic trading strategy (relating to equity, preferred or convertible debt securities), or who is responsible for the day-to-day supervision or direction of such activities, must pass the Series 57 exam and register as a Securities Trader.

For example, a lead developer who liaises with a head trader regarding algorithmic strategy and is responsible for day-to-day supervision or the implementation team must be registered. Individuals under a lead developers’ supervision (junior developers) are not required to register.

Having the Chief Compliance Officer register as a Securities Trader or Securities Trader Principal will help ensure a supervision structure is in place for compliance oversight of the algorithmic trade strategy.

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Question: What if an employee is only integrating an algorithm change into the firm and testing the system?

Answer:

In some cases, a person implementing changes to trade strategy may not be required to hold the Series 57 designation. For example, individuals under a lead developers supervision are generally not required to register as series 57 if they are not responsible for design, development, or significant modifications, such as a junior developer.

FINRA generally requires all “registered persons” be assigned to a “registered principal” who has supervisory authority.

This amendment requires associated persons responsible for the design, development, or significant modification; or day-to-day supervision to pass the series 57 examination. In practice developers may not currently report to a registered person. FINRA believes it is acceptable to assign a lead developer to an appropriate registered person and does not required every person associated with the system be registered, and will evaluate each firms supervisory structure on a case-by-case basis.

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Question: How does FINRA Regulatory Notice 16-21 apply if my firm uses a third party to develop the Algorithm Trade System?

Answer:

Some firms use algorithmic trading services provided by a third party. In these cases, where design and development of an algorithmic trading strategy is performed solely by a third-party, registration under series 57 is not required with respect to the firm’s activities relating to the design or development of such algorithm. However, associated persons who are able to significantly modify the algorithmic trading strategy in-house must be a Securities Trader.

Firms engaging a third-party to build an algorithmic trading strategy for the firm are advised the third-party in the design or development of the algorithmic trading strategy must be a Securities Trader. Further, if the firm directs the third-party significantly as to the algorithmic trading strategy, such direction also must be by a Securities Trader. Finally, after the firm system is launched, the person primarily responsible for any significant modifications must be a Securities Trader.

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Question: Who is ultimately responsible for mishaps should the algorithm fail to function or comply with compliance standards?

Answer:

Generally registered principals who have a requisite degree of authority and responsibility over the conduct of a line employee are liable for the line employee actions. Determination of supervisory status may include;

  • Has the person clearly been given, or otherwise assumed, supervisory authority or responsibility for particular business activities or situations?
  • Do the firm’s policies and procedures identify the person as responsible for supervising or overseeing business persons or activities?
  • Did the person have the power to affect another’s conduct? For example, did the person have the ability to hire, reward or punish that person?
  • Did the person otherwise have authority and responsibility such that he or she could have prevented the violation from continuing, even if he or she did not have the power to fire, demote or reduce the pay of the person in question?
  • Did the person know that he or she was responsible for the actions of another, and that he or she could have taken effective action to fulfill that responsibility?
  • Should the person nonetheless reasonably have known in light of all the facts and circumstances that he or she had the authority or responsibility within the administrative structure to exercise control to prevent the underlying violation?

Firms themselves and the registered principals are assigned responsibility for the actions of supervised employees regardless of whether they are an internal line employee or an outsourced service, or other third party relationship.

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Algorithm Trade Regulation

Question: What is FINRAs definition of Algorithmic Trading Strategy – July 2016?

Answer:

Under the rule, an “algorithmic trading strategy” is an automated system that generates or routes orders (including sending orders for routing and order-related messages, such as cancellations), but does not include an automated system that solely routes orders, in their entirety, to a market center. Covered systems include those that generate or route orders (or order-related messages) in any equity security (including options), preferred security or convertible debt security, whether sent to an exchange or handled over the counter. Examples of systems that are considered algorithmic trading strategies if they generate or route orders and include:

  • An arbitrage strategy, such as index or exchange-traded fund (ETF) arbitrage;
  • A hedging or loss-limit algorithmic strategy that generates orders on an automated basis;
  • A strategy that involves simultaneously trading two or more correlated securities due to the divergence in their prices or other trading attributes;
  • An order generation, routing and execution program used for large-sized orders that involves dividing the order into smaller-sized orders less likely to result in market impact;
  • An order routing strategy used to determine the price or size for routed orders, the use of “parent” or “child” orders, or displayed versus non-displayed trading interest;
  • A trading strategy that becomes more or less aggressive to correlate with trading volume in specified securities;
  • A trading strategy that generates orders based on moving reference prices;
  • A trading strategy that minimizes intra-day slippage in connection with achieving volume-weighted average prices and time-weighted average prices; and
  • A strategy that creates or liquidates baskets of securities, including those that track indexes or ETFs.
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Question: Which Automated Systems are not considered part of an Algorithmic Strategy?

Answer:

An automated system that solely routes orders received in their entirety to a market center is not considered an “algorithmic trading strategy”. This may include standard order routers that submit retail orders in their entirety to a particular market center for handling and execution. Additionally, an algorithm that generates trading ideas or investment allocations, but is not equipped to automatically generate orders does not generally constitute an algorithmic trade strategy.

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Question: What is the effective date for implementing the qualification and registration requirement?

Answer:

Firms need to have the registrations complete by January 30, 2017. Registration for Series 57 opened in January 2016.

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Question: Who is ultimately responsible for mishaps should the algorithm fail to function or comply with compliance standards?

Answer:

Generally registered principals who have a requisite degree of authority and responsibility over the conduct of a line employee are liable for the line employee actions. Determination of supervisory status may include;

  • Has the person clearly been given, or otherwise assumed, supervisory authority or responsibility for particular business activities or situations?
  • Do the firm’s policies and procedures identify the person as responsible for supervising or overseeing business persons or activities?
  • Did the person have the power to affect another’s conduct? For example, did the person have the ability to hire, reward or punish that person?
  • Did the person otherwise have authority and responsibility such that he or she could have prevented the violation from continuing, even if he or she did not have the power to fire, demote or reduce the pay of the person in question?
  • Did the person know that he or she was responsible for the actions of another, and that he or she could have taken effective action to fulfill that responsibility?
  • Should the person nonetheless reasonably have known in light of all the facts and circumstances that he or she had the authority or responsibility within the administrative structure to exercise control to prevent the underlying violation?
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Question: Is there a suggested practice guide for firms engaging Algorithmic Trade Strategies?

Answer:

Yes, FINRA released guidelines for firms engaged in Algorithmic Trade Strategy in March 2016, Regulatory Notice 15-09. Their Supervision and Control practices guide is for firms engaging in Algorithmic Trading Strategy and covers the areas of General Risk Assessment and Response; Software / Code Development and Implementation; Software Testing and System Validation; Trading Systems; and Compliance. The suggested practices were compiled by FINRA staff in response to examination and investigation results of industry algorithmic trade firms.

Read the Equity Trading Initiatives: Supervision & Control Practices for Algorithmic Trading Strategies here

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RND Resources Inc provides regulatory compliance support and consulting for firms that use Algorithm Trade Strategy and High Frequency Trading. Our firm holds the requisite registration, Series 24 and Series 55 which is now 57, to act as Principal for your brokerage should you need it. We also have expertise updating and developing compliance procedures for start up and established firms. If your staff finds keeping up with regulatory rule changes a burden, let us provide support so you can continue to build and grow the business. We specialize in integrated compliance solutions that include; business planning, operations, trading, registration, and compliance into one coordinated program. Visit our services page for more information.

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